Maximize Your Business Sale Price
8 Secrets to Maximize Your Business Sale Price
Want to maximize your business sale price? As business brokers, we’ve had thousands of 1 on 1 conversations with buyers. In these conversations, we couldn’t help but notice similar road blocks to selling a business. We also noticed that some business sold and at a great price. We categorized these issues into what we call our 8 Sellability Drivers. These Sellability Drivers have huge impacts on whether you can maximize your business sale price.
Recent studies have shown that only 1 in 5 businesses sell on the open market. Only 20%!? That’s crazy! Having worked with 100s of businesses over the years, we at Exit Brokers began to wonder what makes a business attractive to buyers. By knowing what makes your business attractive, you can increase your odds of selling–and selling at top dollar–when the time comes. We’ve identified 8 drivers to maximize your business sale price.
Do You Have a Sellable Business?
Take Our FREE Assessment and Find Out Today
Maximum Price Driver 1: Business Financials
The first and one of the most important drivers relates to the business financials. Most business owners will tell you they don’t like paying taxes. Their dislike for taxes causes them (or their accountant) to ‘expense’ every conceivable item they can. After all, if it’s a business expense, it reduces their taxes.
We’ve seen everything from country club memberships and season ski passes to trips to Napa expensed. While we are not ones to provide tax advice, this seems a bit over-the-top. In reality, buyers think the same thing and it turns them away from the business.
Want Maximum Sale Price? Reporting All Business Income
Another common issue we encounter is around cash. Every business owner who gets paid in cash deposits every dollar into their bank account, right? The overwhelming answer is, “No”. Again, let’s chalk it up to tax aversion. Far too often we hear of there being 10% (or more) additional revenue than what shows up on the profit and loss.
Nothing turns away a buyer more than unreported cash income. Especially when they are asked to accept a seller’s word that there’s $200,000 additional, unreported cash revenue. And you guessed it, nothing diminishes the value of a business more than unreported cash income.
Businesses that attract buyers have ‘clean’ financials. By clean, we mean they mostly include only true business expenses. Clean financials allow buyers to clearly see the net income of the business. What a buyer can see, they are more likely to believe. Business price is determined by what you can prove through your business financials.
Maximum Price Driver 2: Growth Opportunities
A common saying is: a business is bought for its future opportunity, but the price is based on its history. Growth opportunities are very important to buyers. Is your business in an industry that is dying or thriving? Are your customers tapped out or are there strong streams of new potential customers? These things matter to a buyer as they start to visualize themselves running the business.
There are a number of ways to grow revenue quickly after acquiring a business. One of the easiest ways is to sell more to current customers. This can be done by offering complementary products or services to your current offering.
Another revenue growth strategy would be find new customers. Is it difficult for your business to find new customers? If so, this could be a problem. Better to solve it now before it makes your business less attractive to buyers. Can you expand into a new territory? Another option is add new products or services to create new potential customer pools. Either way, a business with future growth potential is attractive to buyers.
Does your business customize its products and services or does it offer identical offerings to everyone? This has to do with the ability to scale operations and grow quickly with repeatable processes. Often a business’s current growth is held back by an owner who customizes everything for customers. This makes it difficult because the business can only sell as much as the owner can make.
Maximum Price Driver 3: 3rd Party Independence
Another big characteristic of an attractive business is no third party dependence. By this, we mean having diversity of customers, suppliers, and vendors. Too many times we’ve seen a business owner get comfortable with the 1 or 2 big customers. These customers now represent a large percentage of total revenue. Not a problem, right? BIG PROBLEM!
The biggest factor in business valuation is reliability of income. Having a large percentage of your revenue tied to one party drastically increases risk. The risk is that this big customer doesn’t stick around after the sale. Now the business has half the original revenue but the buyer is still paying full price.
Alternatively, does the business have customers or suppliers who the business is dependent upon? If so, we recommend making them less important. Either go find more customers or grow the revenue from existing customers. Either way, nothing kills a deal faster than uncertainty of income related to the customer that’s too big.
We’ve also seen it where a business got the majority of its supplies from one company. One day, the supplier discovered another business would pay more for its limited supply. This left the business owner in a difficult spot with an unattractive business. Decrease your 3rd party dependence and watch how potential buyers start flocking in.
Get our FREE Business Value Calculator
Business Valuation Estimate Worksheet.
Maximum Price Driver 4: CashFlow
In business school, they teach that a profitable business can go out of business. That concept always seemed odd until real life examples starting presenting themselves. Let’s paint the scenario for you. Business sells its products but isn’t paid for 90 days because it sells to Fortune 500 customers. Business has to pay its vendors and suppliers in 30 days. This means the business has to ‘float’ itself for 120 days.
The above example causes substantial issues. One paper, this business could be very profitable, but every day is very stressful. For one, it can easily go out of business. Secondly, it will struggle to grow which is a big concern for buyers. Businesses need cash to grow. Equipment costs money. Raw materials and inventory costs money. Employees and other bills need to be paid.
The biggest factor in business valuation is reliability of income. Having a large percentage of your revenue tied to one party drastically increases risk. The risk is that this big customer doesn’t stick around after the sale. Now the business has half the original revenue but the buyer is still paying full price.
The most attractive businesses have an abundance of cash. Here’s an alternative scenario. Customers pay the business and then the product is deliver or the service occurs. The business then has 60 days to pay its suppliers. This means the business never has to float itself–it can pay its expenses with cash. As for growth, the business can grow as fast as it can acquire new customers and makes sales.
Want to Maximize Your Business Sale Price? Improve Your Cash Flow Will Help!
If you look at some of the powerhouse business around today, you’ll see the importance of cashflow. Software businesses charge their fee for the year upfront. Amazon doesn’t ship a thing until they’ve been paid. AirBnB charges the full amount weeks or months before they have to pay their property owners. Cash is and will always be king.
Cash flow for buyers makes a difference in whether they need to bring ‘working capital’ to the table. This means if a business is cash poor, a buyer may need 90 days worth of capital in addition to the business price amount. Alternatively, if a business is cash rich, a buyer doesn’t need to bring any working capital into the business. Cash rich businesses attract buyers like bees to honey.
Maximum Price Driver 5: Predictable Revenue
As we discuss in the business valuation page, businesses have value because of the income they produce. The best investments are those with tremendous upside and minimal risk. How can you make your business like a ‘best investment’? For one thing, you can make it so the business revenue is all but guaranteed in the future.
As an example, let’s look at service business that has contracts with its customers for the next 5 year period. These are rare, but they are possible. A buyer would know that the revenue is very predictable and certain to continue on. If revenue is predictable, profits should be predictable too.
Predictable Revenue => Maximize Your Business Sale Price
A simpler and more common business model would be a recurring fee for a service. Security businesses provide a nice contrast. Security businesses can install the security equipment and/or provide ongoing monitoring. The installing businesses charge a one-time fee while monitoring businesses charge recurring fees. Size being similar, the monitoring business go for twice the price. Monitoring businesses are also much easier to sell. In other words, having predictable revenue makes you worth more AND more attractive to buyers.
Convinced you can’t create recurring, predictable revenue in your business? It’s time to think outside the box. Not only will it make life as an owner less stressful, you’ll likely enjoy it more. Imagine knowing month-in-and-month-out that 50% of your revenue will come in the door. Buyers want to buy a business they will enjoy and predictable revenue decreases stress and makes ownership fun. Will predicable revenue help you maximize your business sale price … heck yes it can!
Maximum Price Driver 6: Barriers to Entry
Harvard professor Michael Porter wrote about competition in his famous Porter’s Five Forces framework. His framework relates really well with Driver of business attractiveness. Would it be feasible for a buyer to start a business like yours from scratch instead of buying it. If the answer is “yes”, it means the business has low barriers to entry.
The most attractive businesses would be very difficult for someone to start from scratch. These business might have some unique trade secret or patent protection. Alternatively, they might just offer a great product or service with very sticky customers. Whatever it is, the threat of competition coming along and stealing their revenue is not a concern.
Businesses with high barriers to entry decrease future risk. Risk creates uncertainty. So if we can decrease risk, business value with increase. It is that simple.
As a business owner, what can you do to decrease the risk of competitor entering your market? Here is a brief list of ways to improve barriers to entry: obtain patents or licenses from a patent holder, establish exclusive distribution networks or rights to resources, improve economies of scale, add switching costs (think cell phone carriers), and invest in equipment that advances your product offering beyond the industry average.
Maximum Price Driver 7: Referable Brand
Have you recently been asked to rate a company based on the likelihood that you’d refer their business to others? That metric is tied to something called the net promotor score. It is a metric created to determine customer loyalty. It’s powerful because it showed that strong customer loyalty leads to highly attractive businesses.
Does your customers love you? If so, your business will be ore attractive to buyers. Some ways to prove your customer loyalty is through your online reviews. I’ve seen a company that’s great on paper have trouble selling because it didn’t have strong online reviews. Unfortunately there is not a quick fix to customer loyalty. A business either has it or it doesn’t. If it doesn’t have it, it will take time to fix it.
We recommend business owners work towards a culture focused on ‘wowing’ your customers. A great culture starts at the top. As an owner, you should do everything you can to accumulate great reviews. A culture focused on ‘wowing’ customers has the added benefit of generating referrals. Happy customers refer their friends and co-workers. Referrals cut down business marketing costs which makes your business more profitable.
Another reason brand loyalty is so important is it creates repeat customers. Repeat customers leads to more predictable revenue which decreases risk. Happy customers are likely to continue buying even after a business is sold. Confidence in customers sticking with a business makes a business very attractive to buyers.
Maximum Price Driver 8: Owner Dependence
Last, but probably the most important driver is owner dependence. If a stranger asked ‘can I sell my business’, my first question would be how involved are you in the business? We often meet with business owners who are too crucial to the success of a business. With some businesses, it becomes difficult to separate the business from the owner. The business essentially IS the owner. This makes a business incredibly unattractive to a buyer. Unless they have the exact same skill set as the seller, they can’t see the business succeeding. This is a problem. Because this is so important, here are a few strategies to decrease owner dependence.
First, make yourself unimportant to the success of the business. Delegate as much as possible. Along with hiring new staff, there are so many great resources out there for today’s owner. To list a few, these resources include outsourced HR, payroll, IT, sales, lead generation, and accounting services. It is also possible to leverage virtual assistants, virtual receptionist, and freelancers. There is no reason an owner should be spending valuable time on tasks someone else could be doing.
Delegate, Delegate, Delegate!
As an owner, identify the top three activities critical to business success and delegate the rest. Once this has happened, go one step further and narrow those three activities down to the ONE most important. Then delegate the other two activities. A business that requires learning only one skillset will be much more attractive than on that requires five or six new skills. By focusing on your most crucial activities, your business will likely see substantial growth and you’ll likely enjoy working more.
Second, work towards removing yourself from direct contact with customers. Put a customer service or sales rep in charge of managing customers for you. It is scary for a buyer when the seller has a personal relationship with every customer. If you are the salesperson, hire other salespeople and train them to replace you. This will force you to systemize and document your sales process so others can learn it. This will lead to a scalable and repeatable sales process.
Thirdly, focus on creating scalable, repeatable products and services. Offering customized solutions is a difficult growth model. It only works if you have a very talented design and production team. More often than not, that design and production team IS the owner. Simplify your product and service offering so others can produce it instead of you. This allows you to hire people and train them as your production needs grow.
Lastly, work towards a business that is passive. A passive business runs without the owner needing to be present. This is the ultimate attractive trait for a business. A business becomes a true investment when the owner gets to sit back and receive the paychecks every month. And you guessed it, a buyer will much more for a passive business that’s not dependent on the owner.
Conclusion: Use Our 8 Secrets to Maximize Your Business Sale Price
You might be thinking, “Wow, that is a lot to think about”. You are right. Building a great business takes time, focus, and patience. If you’ve made it this far, chances are you are serious about maximizing the value of your business before you exit. Expect it to take 2-3 years before you see noticeable increase in value.
Chances are good you have several of these drivers nailed down. For instance, you might have clean financials, great cashflow and predictable revenue, but too much owner dependence. This is a great! That means you have a strong foundation and business that could likely be sold as-is. The benefit to working on your business could be a six or seven figure difference. By making your business more attractive, you will put additional dollars directly in your pocket when it’s time to exit or sell.
Not sure where to start? We suggest getting your free ExitReady Score. This will provide you and your business with custom feedback on all 8 Sellability Drivers. Learn your business’s strengths and areas of opportunity and you too can maximize your business sales price!